Indonesia - Rupiah woes: Clock ticking for unhedged Indonesian companies

GRAPHIC: Rising forward premium: link.reuters.com/pes74w

BENGALURU, May 20 (Reuters) - The cost of hedging against a falling rupiah has soared to six-year highs, a growing headache for Indonesian companies that have yet to cover themselves for more expensive offshore debts and imports.

The rupiah is trading at its lowest level against the dollar since the 1997-98 Asian financial crisis. It is the worst performer among Asian currencies this year, hurt by the strength of the dollar and a surprise central bank interest rate cut in February. The rupiah's 6 percent slump against the U.S. currency this year has widened the premium of 12-month forward rates to spot rates. The premium has risen to more than 1,000 rupiah since April.

The 8 percent premium to spot rates looks set to persist - if not increase - with the rupiah poised to give up more ground in the spot market. The higher hedging costs will affect foreigners with portfolio investments in Indonesia, raising the possibility of a flight of capital. The rupiah's depreciation has also pushed up import prices of raw materials such as metals, chemicals and plastics at a time when exporters are seeing a drop in orders due to weak demand. A recent Reuters poll shows the dollar is expected to strengthen to around 13,600 rupiah by the first quarter of 2016 from 13,200 currently.

The increasing currency headwinds have not gone unnoticed by the central bank, Bank Indonesia, mindful of the 1997-98 crisis when the plunging rupiah bankrupted businesses with huge offshore borrowings. "It is probably not going to be as intense as the case then," said Singapore-based Vishnu Varathan, senior economist at Mizuho. "Some of the currency and maturity mismatches during the Asian financial crisis were far worse. We look at coverage ratios in terms of debt or forex reserves. There has been some deterioration over the last few years, but overall Indonesia is on a firmer footing now than it was then."

Bank Indonesia last year introduced rules requiring companies to hedge at least 20 percent of their short-term net foreign liabilities in 2015 and at least 25 percent after that. As of the end of December, short-term gross external debt held by the non-bank sector totalled $23.9 billion, near the record $24.1 billion in September 2013. It is not known how many companies are taking or have taken steps to reach Bank Indonesia's ideals.

By Patturaja Murugaboopathy

(Editing by Ryan Woo)

Reuters

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